Finance - Financial Statements

Question 1

What do the financial statements of sole traders businesses consist of?

Answer 1

1. Income statement
2. Statement of financial position

Question 2

What sections are apart of an income statement?

Answer 2

1. Sale revenue
2. Cost of sales - cost of sales = opening inventory + purchases - closing inventory
3. Gross profit - gross profit = sales revenue - cost of sales
4. Expenses
5. Net profit - net profit = gross profit - expenses

Question 3

What is the importance of an income statement to a business?

Answer 3

This will summarize revenues, costs and the profit/loss of the business. It also indicates the overall profitability of the business overall.

Question 4

What is the statement of financial position?

Answer 4

It shows the value of the business’ assets, liabilities and net worth
Net worth = total assets - total liabilities

Question 5

Assets are divided into non current and current assets, what are non current and current assets?

Answer 5

. Non current - assets that are more permanent in the business (machinery, vehicles, etc)
. Current - assets that can be quickly exchanged for cash (inventory, trade receivables, etc)

Question 6

What are non current and current liabilities?

Answer 6

. Non current liabilities - liabilities borrowed for a longer time (bank loan)
. Current liabilities - liabilities that must be paid immediately (overdraft, trade payables)

Question 7

What does the statement of financial position record?

Answer 7

. The business’ assets (divided into current and non current assets)
. The business’ liabilities (divided into current and non current liabilities)
. The owners capital (amount of their original investment)
. The owner’s drawings (cash or goods withdrawn from the business by the owner for their personal use)
. The net profit (transferred from income statement)

Question 8

What is the importance of a statement of financial position to a business ?

Answer 8

It summarizes the assets, liabilities and capital for the business. It also indicates overall profitability and solvency for the business and allow the owner to review key aspects of financial performance